This report analyses the market position and strategies of five global online entertainment platforms – Amazon, Apple, Facebook, Google and Netflix.
It also explores how improvements in digital technologies, consumer electronics and bandwidth are changing the online entertainment market, while explaining the ongoing uncertainty around net neutrality. The report then considers how well each of the five major entertainment platforms is prepared for the likely technological and regulatory changes in this market. Finally, it provides a high level overview of the implications for telco, paving the way for a forthcoming STL Partners report going into more detail about potential strategies for telcos in online entertainment.
The rise and rise of online entertainment
As in many other sectors, digital technologies are shaking up the global entertainment industry, giving rise to a new world order. Now that 3.2 billion people around the world have Internet access, according to the ITU, entertainment is increasingly delivered online and on-demand.
Mobile and online entertainment accounts for US$195 million (almost 11%) of the US$1.8 trillion global entertainment market today. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.
Two leading distributors of online content – Google and Facebook – have infiltrated the top ten media owners in the world as defined by ZenithOptimedia (see Figure 1). ZenithOptimedia ranks media companies according to all the revenues they derive from businesses that support advertising – television broadcasting, newspaper publishing, Internet search, social media, and so on. As well as advertising revenues, it includes all revenues generated by these businesses, such as circulation revenues for newspapers or magazines. However, for pay-TV providers, only revenues from content in which the company sells advertising are included.
Figure 1 – How Google and Facebook differ from other leading media owners
Source: ZenithOptimedia, May 2015/STL Partners
ZenithOptimedia says this approach provides a clear picture of the size and negotiating power of the biggest global media owners that advertisers and agencies have to deal with. Note, Figure 1 draws on data from the financial year 2013, which is the latest year for which ZenithOptimedia had consistent revenue figures from all of the publicly listed companies. Facebook, which is growing fast, will almost certainly have climbed up the table since then.
Figure 1 also shows STL Partners’ view of the extent to which each of the top ten media owners is involved in the four key roles in the online content value chain. These four key roles are:
- Programme: Content creation. E.g. producing drama series, movies or live sports programmes.
- Package: Content curation. E.g. packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
- Platform: Content distribution. E.g. Distributing TV channels, films or music created and curated by another entity.
- Pipe: Providing connectivity. E.g. providing Internet access
Increasing vertical integration
Most of the world’s top ten media owners have traditionally focused on programming and packaging, but the rise of the Internet with its global reach has brought unprecedented economies of scale and scope to the platform players, enabling Google and now Facebook to break into the top ten. These digital disruptors earn advertising revenues by providing expansive two-sided platforms that link creators with viewers. However, intensifying competition from other major ecosystems, such as Amazon, and specialists, such as Netflix, is prompting Google, in particular, to seek new sources of differentiation. The search giant is increasingly investing in creating and packaging its own content. The need to support an expanding range of digital devices and multiple distribution networks is also blurring the boundaries between the packaging and platform roles (see Figure 2, below) – platforms increasingly need to package content in different ways for different devices and for different devices.
Figure 2 – How the key roles in online content are changing
Source: STL Partners
These forces are prompting most of the major media groups, including Google and, to a lesser extent, Facebook, to expand across the value chain. Some of the largest telcos, including Verizon and BT, are also investing heavily in programming and packaging, as they seek to fend off competition from vertically-integrated media groups, such as Comcast and Sky (part of 21st Century Fox), who are selling broadband connectivity, as well as content.
In summary, the strongest media groups will increasingly create their own exclusive programming, package it for different devices and sell it through expansive distribution platforms that also re-sell third party content. These three elements feed of each other – the behavioural data captured by the platform can be used to improve the programming and packaging, creating a virtuous circle that attracts more customers and advertisers, generating economies of scale.
Although some leading media groups also own pipes, providing connectivity is less strategically important – consumers are increasingly happy to source their entertainment from over-the-top propositions. Instead of investing in networks, the leading media and Internet groups lobby regulators and run public relations campaigns to ensure telcos and cablecos don’t discriminate against over-the-top services. As long as these pipes are delivering adequate bandwidth and are sufficiently responsive, there is little need for the major media groups to become pipes.
The flip-side of this is that if telcos can convince the regulator and the media owners that there is a consumer and business benefit to differentiated network services (or discrimination to use the pejorative term), then the value of the pipe role increases. Guaranteed bandwidth or low-latency are a couple of the potential areas that telcos could potentially pursue here but they will need to do a significantly better job in lobbying the regulator and in marketing the benefits to consumers and the content owner/distributor if this strategy is to be successful.
To be sure, Google has deployed some fibre networks in the US and is now acting as an MVNO, reselling airtime on mobile networks in the US. But these efforts are part of its public relations effort – they are primarily designed to showcase what is possible and put pressure on telcos to improve connectivity rather than mount a serious competitive challenge.
- Executive Summary
- The rise and rise of online entertainment
- Increasing vertical integration
- The world’s leading online entertainment platforms
- A regional breakdown
- The future of online entertainment market
- 1. Rising investment in exclusive content
- 2. Back to the future: Live programming
- 3. The changing face of user generated content
- 4. Increasingly immersive games and interactive videos
- 5. The rise of ad blockers & the threat of a privacy backlash
- 6. Net neutrality uncertainty
- How the online platforms are responding
- Conclusions and implications for telcos
- STL Partners and Telco 2.0: Change the Game
- Google is the leading generator of online entertainment traffic in most regions
- How future-proof are the major online platforms?
- Figure 1: How Google and Facebook differ from other leading media owners
- Figure 2: How the key roles in online content are changing
- Figure 3: Google leads in most regions in terms of entertainment traffic
- Figure 4: YouTube serves up an eclectic mix of music videos, reality TV and animals
- Figure 5: Facebook users recommend videos to one another
- Figure 6: Apple introduces apps for television
- Figure 7: Netflix, Google, Facebook and Amazon all gaining share in North America
- Figure 8: YouTube & Facebook increasingly about entertainment, not interaction
- Figure 9: YouTube maintains lead over Facebook on American mobile networks
- Figure 10: US smartphones may be posting fewer images and videos to Facebook
- Figure 11: Over-the-top entertainment is a three-way fight in North America
- Figure 12: YouTube, Facebook & Netflix erode BitTorrent usage in Europe
- Figure 13: File sharing falling back in Europe
- Figure 14: iTunes cedes mobile share to YouTube and Facebook in Europe
- Figure 15: Facebook consolidates strong upstream lead on mobile in Europe
- Figure 16: YouTube accounts for about one fifth of traffic on Europe’s networks
- Figure 17: YouTube & BitTorrent dominate downstream fixed-line traffic in Asia-Pac
- Figure 18: Filesharing and peercasting apps dominate the upstream segment
- Figure 19: YouTube stretches lead on mobile networks in Asia-Pacific
- Figure 20: YouTube neck & neck with Facebook on upstream mobile in Asia-Pac
- Figure 21: YouTube has a large lead in the Asia-Pacific region
- Figure 22: YouTube fends off Facebook, as Netflix gains traction in Latam
- Figure 23: How future-proof are the major online platforms?
- Figure 24: YouTube’s live programming tends to be very niche
- Figure 25: Netflix’s ranking of UK Internet service providers by bandwidth delivered
- Figure 26: After striking a deal with Netflix, Verizon moved to top of speed rankings